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Pidilite: Business as usual - Views on News from Equitymaster

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Pidilite: Business as usual

Jul 26, 2006

Performance summary
Adhesives major, Pidilite announced decent results for the first quarter ended June 2006. For 1QFY07, revenues and net profits were up 26% YoY and 24% YoY respectively. The company has also managed to maintain margins at 1QFY06 levels, despite raw material costs pressures (in light of higher petrochemical prices).

Pidilite: Financial picture
Rs (m) 1QFY06 1QFY07 (%) Change
Net sales 2,327 2,920 25.5%
Expenditure 1,852 2,317 25.1%
Operating profit (EBDITA) 475 603 27.0%
EBDITA margin (%) 20.4% 20.6%  
Other income 44 22 -50.3%
Interest 3 6 76.5%
Depreciation 66 71 8.1%
Profit before tax 450 548 21.7%
Extraordinary item/expense (1) (39) 6350.0%
Tax 144 129.9 -9.9%
Profit after tax/(loss) 305 379 24.2%
Net profit margin (%) 13.1% 13.0%  
No. of shares (m) 25.2 252.4  
Diluted earnings per share (Rs)*   3.9  
Price to earnings ratio (x)   22.5  
* 12 month trailing earnings      

What is the company’s business?
Pidilite is the market leader in craftsmen products, DIY (Do-it-Yourself) products and industrial specialty chemicals. The product range can be broadly classified into two main categories – consumer products and speciality industrial products. On the consumer side, it has products under art materials, publications, adhesives and sealants, fabric care and car care segments. For the less contributive industrial product range, it has products in industrial adhesives, industrial pigments, leather chemicals and textile resins to offer. It has a diverse portfolio in both these segments and its offerings include renowned brands like Fevicol, Steelgrip, Acron and M-seal.

What has driven performance in 1QFY07?
Topline performance: The company registered an overall growth of over 26% YoY in revenues during the quarter. Consumer products continued their strong growth momentum and clocked a 25% YoY growth in the June quarter. It must be noted that within the consumer products category, the adhesives and sealant market, which is estimated at Rs 7 bn, has been growing at over 15% rate over the past few years. This has probably aided Pidilite’s growth in the fiscal. As for the industrial products segment, which supplies adhesives, resins and pigments to industries, revenues have grown by 16% YoY in this quarter.

Segment-wise performance
(Rs m) 1QFY06 1QFY07 Change
Consumer & bazaar products 2,061 2,577 25.0%
PBIT margin (%) 24.3% 23.1%  
% of revenue 74.8% 76.2%  
Industrial products 695 807 16.2%
PBIT margin (%) 9.2% 13.1%  
% of revenue 25.2% 23.8%  
Total revenues 2,756 3,384 22.8%
PBIT margin (%) 20.5% 20.7%  

Glued margins: Pidilite has managed to maintain operating margins at 1QFY06 levels, despite a rise in other expenses (as a percentage of sales). Savings in staff and raw material costs have helped margins. On a segment-wise basis, PBIT margins of the consumer and bazaar products division contracted from 24.3% in FY05 to 23.1% in FY06. This seems mainly due to the firm global crude prices, whose derivatives are used by Pidilite as its key inputs. Industrial products business witnessed a PBIT margin expansion of 390 basis points to 13.1%. Importantly, the company’s revenue mix is gradually getting skewed towards the consumer products business. This is a positive, considering the superior margin profile of this segment vis-ŕ-vis the industrial segment.

Consolidated cost break-up
As a % of net sales 1QFY06 1QFY07
Total Cost of goods 52.5% 50.1%
Staff Cost 8.7% 8.2%
Other Expenditure 18.2% 21.1%

The bottomline picture: Stable operating margins and lower tax outgo has helped Pidilite post a 24% YoY growth in topline. But for a higher extraordinary expenditure, owing to donations and VRS expenses, the net profit growth would have been higher.

What to expect?
At the current price of Rs 87, the stock is trading at a price to earnings multiple of 22.5 times its trailing 12 month earnings. In June 2006, Pidilite USA Inc, Delware, a wholly owned subsidiary of the company, acquired business and assets relating to Art Materials and Car Care products from two existing companies in USA having combined annual sales turnover of about US$ 19 m (10% of FY06 revenues). This will help the company to increase its topline. However, high crude prices and the subsequent impact in profitability continue to be our main concern.

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